Law Society questions residence test for unit trusts

Reform of the residence definition for PIEs in the Income Tax Act 2007 would help to provide more certainty and also ensure a closer connection with New Zealand, the New Zealand Law Society says.

In a comments paper sent to the Policy Division of Inland Revenue on the proposed design of the Foreign Investor PIE rules, the Law Society says in order to be a PIE, an entity must be New Zealand resident for tax purposes. 

PIES are mostly structured as unit trusts, and this means the bright line test of “place of incorporation” is not open to them, with the PIE needing to rely on more factually intensive tests such as centre of management.

“Some entities that wish to make use of the new regime may have significant elements of their management outside New Zealand,” the Law Society states. “Accordingly, we suggest that consideration be given to whether some reform of the residence definition is necessary for PIEs.” 

The Society says the residence definition would serve two purposes. It would provide certainty for the fund, and ensure that the connection with New Zealand was more than “in name” only.

“For example, a unit trust PIE could be treated as New Zealand resident if it is governed by New Zealand trust law, has a New Zealand resident trustee and/or maintains a register of members in New Zealand.”

The Law Society says it supports Inland Revenues proposals, both in terms of the pure policy perspective, and also the economic development perspective.

© New Zealand Law Society 2008